Business activity in Nigeria contracted in October for the first time in seven months, declining near levels seen in the thick of the cash shortages that rocked the economy in the first quarter of the year, a new Purchasing Managers’ Index (PMI) report has shown.
The latest monthly PMI by Stanbic IBTC Bank released on Wednesday showed the headline index dropped to 49.1 in October from 51.1 in the previous month. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.
October’s PMI also marks the third time activity in the private sector contracted in Africa’s biggest economy this year.
The last time the country’s business activity shrank was in March following the fallout of the severe cash shortages caused by the naira redesign policy of the Central Bank of Nigeria.
“The headline PMI dropped below the 50.0 no-change mark for the first time in seven months in October, thereby signalling a deterioration in business conditions in the private sector,” the report said.
It said at 49.1, the index was down from September’s reading of 51.1 and signalled a slight worsening of operating conditions.
“Central to the challenges for firms in October was the sharpest rise in overall input prices since the survey began almost a decade ago. Purchase costs were up rapidly, largely due to currency weakness but also the lingering impacts of the removal of the fuel subsidy,” it added.
“We are now seeing the reality of the economy. The high cost of sourcing foreign exchange, logistics and energy have dampened investors and consumers’ confidence,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, said.
The PMI index, which measures the performance of the private sector, is derived from a survey of 400 companies from agriculture, manufacturing, services, construction and retail sectors.
It is a composite index based on five individual indexes with the following weights: new orders (30 percent), output (25 percent), employment (20 percent), suppliers’ delivery times (15 percent) and stock of items purchased (10 percent), with the delivery times index inverted so that it moves in a comparable direction.
May’s PMI stood at 54.0, recording the highest growth since the beginning of the year. Until September, the index had declined consecutively for three months.
“Prices have remained elevated, with input and purchase prices remaining at period highs. Input prices increased materially across the major sectors covered, with inflationary pressures most pronounced in wholesale and retail and manufacturing,” Muyiwa Oni, head of equity research, West Africa at Stanbic IBTC Bank, said.
Femi Egbesola, national president of Association of Small Business Owners of Nigeria, said: “The negative growth should have been recorded even before now. Businesses have not just shrunk but quite a number of businesses have also folded up.
“From our own research, over 20 percent have closed shop this year. And we are not seeing any new policy or direction that shows that change is at sight.”
Since May 29 when President Bola Tinubu announced the removal of the petrol subsidy, petrol price has tripled to N617 from N184, while the value of the naira has plunged following the floating of the currency. The naira weakened from 463.38/$ to 789.94/$ as at October 27 on the official market, while the parallel market rate stood at N1,200/$.
The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports, which was suspended in September, pushed its pump price to as high as N1,200 per litre.
The rising cost of energy and FX pushed the country’s inflation rate to an 18-year high of 26.72 percent in September from 25.80 percent in the previous month, according to the National Bureau of Statistics.
“The inflationary environment depressed consumer demand in the month of October, pausing the steady pace of new business expansion for the first time in six months,” authors of the PMI report said.
They noted that the majority of the respondents also signalled an increase in purchase prices linked mainly to exchange rate weakness and higher fuel costs. “The rate of inflation hit a new peak in the survey’s history.”
Last month, the Presidential Fiscal Policy and Tax Reforms Committee, chaired by Taiwo Oyedele, presented recommendations to the president towards addressing critical economic issues including exchange rate management, impact of fuel subsidy removal, moderation of inflation and facilitating economic growth.
Some of them are tax breaks for the private sector in respect of wage increases to low-income earners, transport subsidy and net increase in employment and suspension of Value Added Tax on diesel and tax waivers on Compressed Natural Gas (CNG), CNG conversion, and renewable energy items.
Others include comprehensive review of tariffs on the 43 items unbanned from accessing forex in the official market and fiscal policy review of other items prohibited for imports.
“We only hope that something positive happens in the economy by the time the tax reforms are implemented,” Egbesola of ASBON said.